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Insurance is a complicated thing because it
has been regulated for centuries and it's often regulated at the local level.
In the United States insurance is a really local phenomenon.
The Dodd Frank Act of 2010 created a federal insurance office.
But it's really mainly just a monitoring for risk.
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Also, what protects you if your insurance company goes under?
Well, the regulator is supposed to have checked that they're doing things right.
But what if the regulator messes up and you buy insurance?
And now there's some big catastrophe and the insurance company goes bankrupt and
can't pay you.
So the state governments have set up insurance guarantee funds.
There's a lot of complexity to this whole business.
It's not so simple and easy.
So the first step, it wasn't until the 20th century that these even setup.
It's like deposit insurance when you have a bank.
When you go to the bank,
you'll see FDIC insured, Federal Deposit, Insurance Corporation, but
we have similar insurance of the failure of the insurance companies.
But not until 1941.
There was no insurance guarantee.
So, here's our local insurance guarantee fund, Connecticut Life and
Health Insurance Guaranty Association.
It was created in 1972, it's not, that long ago.
It's kind of remarkable, that before 1972 if your insurance company failed in
Connecticut you were just out of luck.
But now they will ensure your insurance against
a maximum death benefit of $50,000.
It's still not big enough because if you as a young person,
what is your present value, your lifetime present value?
It must be several million dollars.
So $500,000 just doesn't cut it, but at least it's something.
2:54
>> So, when you're talking about AIG the last lecture and
how they take the whole government bailout, what's preventing them
from committing their own moral suspicion of moral dubiousness.
If they know hat there's something like a big catastrophes coming again,
they'll get another bail out because they're so big.
Are there regulations im place?
>> Well the financial crisis of 2008 took everyone by surprise.
3:55
Part of the issue though is that AIG was bailed out but
the stock holders did not do well.
They didn't enrich the stock holders.
It was a disaster.
On top of that I think that our new regulations are stiffer and
and are more aware of that crisis, but you
are getting at a really important problem that too big fail is a natural problem.
When you have a complicated interdependent economic system and if one
big company like AIG fails, that was the biggest insurance company in the world.
4:35
Once one company like that fails,
the government isn't wanted to just let it everything fall where it may.
There's a natural tendency to bail out and it's hard to get past that.
We're making efforts to, but it's a fundamental problem.
4:53
The US Government took over securities regulation
in the 1930s after the Great Depression.
They formed the Securities and Exchange Commission to regulate stocks and
bonds from the federal level.
They never did that for insurance.
In fact the McCarran-Ferguson Act of 1945 delegated
insurance regulation to the states.
So there's 50 different state regulators, all different.
Now this is chaos, because companies like to operate nationally, but
they have 50 different regulators, one for each state.
5:31
So there was a non-profit called National Association of Insurance Commissioners,
NAIC, which is not government.
It's set up by the insurance industry and
they have regular meetings creating suggested laws for insurance.
Robert ShillerSterling Professor of Economics at Yale University
